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Oklahoma Attorney General Scott Pruitt told a U.S. House of Representatives subcommittee Wednesday morning that the Affordable Care Act and its interpretation in an Internal Revenue Service rule differ on one crucial point—their treatment of state and federally established health care exchanges.

The exchanges act as marketplaces where individuals may obtain health insurance.

Oklahoma, which has declined to create a state exchange, has a federal lawsuit pending against the regulation. Thirty-four other states also decided not to set up their own exchanges.

Pruitt said resolution of the exchange question is a critical issue for those 35 states.

He and several other witnesses appeared before the Energy Policy, Health Care and Entitlements Subcommittee, chaired by U.S. Rep. James Lankford (R-OK).

The hearing took place as Congress is about to undertake its 40th vote to de-fund or do away with all or part of the Affordable Care Act.

The U.S. Supreme Court upheld the ACA itself last term, but Oklahoma’s lawsuit targets the IRS regulation.

Lankford said the statute provides for federal premium-assistance subsidies for lower-income residents, but that is coupled with stiff penalties for employers that do not meet certain coverage and other requirements.

He also said the Congressional Budget Office concluded that 75 percent of costs associated with the ACA will require new federal spending.

The subcommittee is part of the House Oversight and Government Reform Committee, chaired by U.S. Rep. Darrell Issa (R-CA).

Issa later called a U.S. Treasury Department official who fielded questions on how the IRS rule was developed “pretty close to a useless witness.” He also indicated that he is prepared to issue a subpoena for related records if the agency does not provide full disclosure of that process.

Pruitt said the IRS rule brings both state and federal exchanges under the act’s provisions, including the penalties—but the law itself does not do so.

“The statute provides subsidies for certain individuals who buy insurance on a state-established exchange, but not on a federally facilitated exchange,” the attorney general said. “These subsidies have significance outside of just spending taxpayers’ money. The federal government’s payment of a subsidy may trigger a substantial penalty for the payee’s employer.”

For companies with more than 50 employees, Pruitt said, those penalties can reach $2,000 per worker, after a 30-employee allowance.

The attorney general said the ACA discusses state-established and federally facilitated exchanges in different sections of the law. Its penalty provision triggers only when the Treasury Department provides a premium tax credit for an employee, he added.

Oklahoma officials balanced the interests involved and opted not to set up a state-operated exchange, Pruitt said.

“The IRS action takes that decision away,” he told the panel.

Jonathan Adler, a professor with Case Western Reserve University School of Law, made an argument similar to Pruitt’s.

He said the state exchange mandate is unenforceable, because the federal government has no authority to “commandeer” state government to implement a federal regulatory scheme.

Adler also argued that there is no identified congressional legislative history to support the IRS interpretation.

Simon Lazarus is senior counsel with the Constitutional Accountability Center.

“I believe that the interpretation of the ACA adopted by the administration is correct,” he said.

Lazarus said interpretations such as Pruitt’s “stiff” the core constituency of the Affordable Care Act—lower-income workers who cannot currently afford health insurance.

Opponents of the law take the exchange language out of context to suit their own purposes, he argued.

Lazarus said the law provides that where a state fails to set up an exchange, the secretary of health and human services must establish and operate one in that state.

The logical interpretation, he said, is that an exchange under federal stewardship is to be the “functional equivalent” of a state-facilitated exchange.

U.S. Rep. Jackie Speier (D-CA) said the ACA was not intended to provide health insurance-premium subsidies to residents of some states, but not others.

Speier said that if Pruitt is victorious in the Oklahoma lawsuit, it would make health care unaffordable to 300,000 Oklahomans.

During his remarks, U.S. Rep. Matthew Cartwright (D-PA) termed the hearing “another partisan attack” on the ACA.

Cartwright said opponents’ actions would create a two-tier society, taking health care away from those who need it most.

Issa said a review of the statute found nothing that allows the IRS rule as written.

The full committee’s chairman also said the U.S. Constitution gives Congress the authority not to appropriate funding for such an effort.

The final witness of the day was Emily McMahon, deputy assistant secretary for tax policy with the U.S. Treasury Department, who was involved in the regulatory process.

“These regulations provide that the premium tax credit is available to eligible individuals enrolling through all exchanges, whether directly operated by a state government or a federally facilitated exchange operated on behalf of a state,” McMahon said.

Language in the law requires federal exchanges to report to the IRS data about premium tax credits, she said, “a requirement that would be pointless unless the enrolling individuals were eligible for the premium tax credit.”

McMahon said there is nothing in the ACA’s legislative history to indicate that Congress intended to limit the tax credits only to state exchanges.

McMahon responded to several lawmakers’ questions on the rulemaking process that an agency working group did a “thorough analysis” in developing the IRS rule. She also said the agency provided lawmakers with thousands of pages of documents and participated in multiple meetings and hearings.

Issa took issue with that, however. He said that nothing in what the panel was given really explains how the rule was developed.

“We asked for the analysis,” he said. “You’ve stonewalled us.”

Indicating that he will have a subpoena issued if necessary, Issa said he wants full disclosure, including records that would help explain how the administration came to the conclusion it reached.

“You were pretty close to a useless witness,” Issa said, adding that McMahon said several times she did not know the answers to some members’ queries as to how the IRS rule came to be. “You sent almost nothing.”